08 Jun The Lato Letter : Volume 1, Issue 17.
The investment management business can be a very humbling one sometimes and the news on Tempur Pedic Inc. this week exemplifies one of those times. You may recall that Tempur Pedic was one of my Top Picks on Market Call on May 14th at a price of $51.03 and was discussed in The Lato Letter on that date.
At that time, the stock had just been featured in Barron’s the previous weekend and had sold off after announcing its first quarter earnings on April 19th. After listening to the conference call following the earnings release and assessing the earnings, I felt that the “nervous” market had overreacted to the earnings report and that the price represented a great entry point and worthy of a “Top Pick” rating.
Quoting from the issue of The Lato Letter following the appearance, “Non-coil mattresses are continuing to gain market share in the overall mattress market and while competition may be increasing, Tempur Pedic is well positioned to continue to grow its business.” Well the highlighted portion of that sentence was certainly an understatement.
On the latest conference call (June 6th), management discussed the rationale for the dramatic decrease in the company’s expectations for the year and increased competition was the major reason. Management acknowledged that they had greatly underestimated the magnitude and the ferocity of the competition and have seen marked slowing in sales despite a significant promotional campaign. This increased competition will continue to impact sales and pricing and since Tempur Pedic is at the high end of pricing spectrum in the mattress industry, it will probably suffer the most margin erosion. Although the valuation based on the current outlook is similar to three weeks ago, I eliminated the holding earlier today because the Tempur Pedic outlook is now much less favourable.
Although never pleasant, fortunately Tempur Pedic was only one stock in a portfolio of stocks and I continue to feel very comfortable with the rest of the holdings in the portfolios, especially my other “Top Picks” from that May 14th show: Apple and Tourmaline. By the way, the Apple World Wide Developers Conference starts on Monday and who knows what surprises might be in store.
The loss on Tempur Pedic is a setback but clients’ portfolios continue to perform well on both an absolute and relative basis.
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